The details are scarce but the investment industry says it has made some inroads on the thorny issue of the Canada Revenue Agency’s investigations into tax-free savings accounts.

The CRA has been conducting an audit project aimed at people who it feels are operating a trading business within their TFSA, basing their suspicions on signs such as high balances and frequent transactions. Investment dealers have written to government asking for better guidelines because they are concerned about footing the tax bill should a client withdrawal all their money ahead of an audit.

“We met with them with a number of other financial industry associations,” said Barbara Amsden, director of special projects for the Investment Industry Association, confirming high-level meetings that took place at the end of February.

She wouldn’t say any sort of resolution was reached but she still considers the meetings to have been successful. Dealers want their liability to be limited to the amount of money in accounts when an audit happens so they won’t be stuck with a shortfall.

“For the first time, I think we actually understood each others’ points of view,” she said. “I think there was concern we were asking for changes that allow transactions or activities that are contrary to the government’s intention.”

Ottawa has said a miniscule number of the 11 million TFSA accounts in Canada are being audited because they are operating as a so-called business.

The two men who might be considered the fathers of tax-free savings accounts in Canada, now worth more than $132 billion, appear to be in disagreement over what happens next to their brainchild.

Jonathan Rhys Kesselman, who co-authored a report back in 2001 with Finn Poschmann, vice-president of policy analysis at the C.D. Howe Institute, is suggesting it’s time to rein in the accounts and not actually increase allowable contributions.

The ruling Tories have pledged to double annual limits once the budget is balanced. The annual allowable TFSA contribution was $5,000 when it was introduced in 2009, but the dollar amount is indexed to inflation and is now $5,500.

Speculation is growing an announcement will be made in the next budget, expected in April. It’s unclear whether the previous pledge by the Tories means the annual limit would climb to $10,000 or $11,000.

Mr. Kesselman, a professor in the School of Public Policy at Simon Fraser University, says increasing annual limits will only benefit the wealthy and end up costing Ottawa billions of dollars more than has been anticipated.

He calls the proposal a “ticking time bomb.”

“Like a little baby who looks cuddly and cute, this proposed initiative would grow up to be the hulking teenager who eats everyone out of house and home,” writes Mr. Kesselman in a report titled Double Trouble: The Case Against Expanding Tax-Free Savings Accounts, published Tuesday by the left-leaning Broadbent Institute.

His stand pits him against Mr. Poschmann, who remains at the right-leaning C.D. Howe Institute, where the two resided when they wrote their original paper. At the time, both argued in that paper that the tax-free accounts would be of chief benefit to low- and moderate-income workers.

Mr. Poschmann points out that two-thirds of TFSAs are held by tax filers reporting incomes of less than $60,000. “One of the reasons that we wanted TFSAs in the first place was to make it easier for more people of different types and different income levels to save and have flexibility of how they went about saving,” he said.

“The fact that some high-income earners are able to take advantage of the same program doesn’t mean it’s a bad program.”

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On the issue of doubling contributions, he says that will only encourage Canadians to save even more. “Savings add up. Add $5,000 a year, give it a few years and a few decades and it makes a huge difference,” said Mr. Poschmann, who would stop at $11,000 annually for now.

Mr. Kesselman says even at existing contribution levels, within 40 years TFSAs could cost the federal government $15.5 billion annually in lost revenue and the provinces $9 billion, figures that would be “inflated” by doubling contributions limits.

TFSA contributions grew to $33.5 billion in 2012, surpassing RRSP deductions of $32.4 billion for that year. While the market value of TFSAs was $18 billion at the end of 2009, the year the investment product was introduced, money held in accounts had ballooned to $132 billion as of mid-2014.

The parliamentary budget officer said Tuesday TFSA contribution room will grow from $1-trillion in 2015 to $9 trillion by 2080 and estimates the fiscal impact to be $1.3 billion this year.

A statement from Joe Oliver, the finance minister, indicated his continued support for the TFSA but did not mention the issue of doubling contribution levels.

“Our government introduced tax free savings accounts as a way for Canadians to save for retirement, their kids’ education and the down-payment on a house,” Mr. Oliver. Today, nearly 11 million Canadians of all ages and income levels have a TFSA, with the vast majority of accounts belonging to low and middle-income earners. Only our government can be trusted to keep taxes low for Canadian families.”

Mr. Kesselman suggests by putting pressure on the government now, it might force the Conservatives to scale down the plan.

“The Conservatives do pride themselves on doing everything that’s in their [2011] campaign platform. They sharply changed their package on income-splitting,” said Mr. Kesselman about a measure the Tories announced in October which provides a non-refundable credit of up to $2,000 for couples with children under 18.

This time he thinks the Tories can be convinced to make changes, in addition to not increasing the annual contribution limit, like setting a lifetime limit on holdings that would be tax-free and making sure withdrawals count against income-tested programs like old age security and guaranteed income supplement.

His counterpart Mr. Poschmann doesn’t agree with the idea of a lifetime limit. “Why don’t we impose limits on asset accumulation within RRSPs? We don’t, because the withdrawals are going to be taxed anyway. And withdrawals count as income toward eligibility for income-tested benefits like OAS/GIS, which have big clawbacks,” he said.

Current rules don’t call for the same clawback when it comes to TFSAs. “That is one of the reasons, the main reason, we wanted TFSAs – so that low-income people, and especially seniors, wouldn’t be made to look like financial fools for trying to save,” said Mr. Poschmann.

He might be convinced to accept Mr. Kesselman’s contention that TFSA money counts toward calculating eligibility for OAS and GIS.

“There is a longer-term policy question about rules for OAS/GIS eligibility: Are we comfortable paying such benefits to people who have significant assets? The structure of those benefit plans, and whether there are circumstances that might warrant assets for them, is a subject for legitimate long-term policy debate. It is not, however, a reason for denying people generous access to TFSAs now,” said Mr. Poschmann.

Here’s a new idea: instead of following the crowds pumping unthinking amounts of money into so-called Tax Free Savings Accounts (TFSAs), how about paying down some of your own debt?

In fact, consider completely eliminating all your debt before venturing anywhere near a TFSA. This is especially true of “bad debt” such as credit cards, consumer loans and mortgages on your principal residence. This debt is bad because your interest expense is not accompanied by a tax deduction. Examples of “good debt” include investment loans and mortgages on rental properties where your interest expense is a tax deduction.

Beware that the banks and other financial institutions would like you and your family to have lots of TFSA deposits. At the same time the banks wish you to burden yourself with loans, mortgages and outstanding credit-card debt. In reality you borrow your own money. In effect, the banks profit by renting your own money back to you.

This might not be so bad if it weren’t for the massive spread involved. Your $5,500 TFSA deposit might earn 2.5% for annual interest income of $138 on which you might have paid about $50 in taxes. That’s less than a dollar a week in taxes saved. However, an outstanding credit card balance of $5,500 costs annual interest expense of $1,100 at the 20% charged by most banks. Remember that’s an after-tax figure. To have $1,100 in your pocket to pay the credit card interest expense, you have to go to work and earn about $1,700 before income tax depending on your tax bracket. The before-tax cost of your credit card is actually about 31%. The spread.

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Better no TFSA at all if it means having less bad debt. This is true of almost all debt as the spread always favours your lender.

As columnist Jane Macdougall recently rejoiced in the Weekend Post as the nation’s attention turns to financial matters (“Burn Notice: The pleasures of putting your financial feet to the fire” Jan. 3, 2015): “I called up a friend to see what she had to say about where the money goes. She couldn’t come to the phone as she was confined to bed with a severe overdraft.”

In street parlance, many bank customers are being hosed. Perfectly legal.

Elsewhere on the same day in the Financial Post (“Five ways to kick-start tax savings” Jan. 3, 2015) a bank-employed tax expert advised: “After all, there is really no reason anyone should have anything invested in a non-registered account if you haven’t maximized your cumulative TFSA contributions.”

Maybe the best thing to do (once you’re free of bad debt of course) is to invest your TFSA money in the common shares of your bank.

Spread the joy of the spread!

Christopher Cottier is an advisor at Richardson GMP, Canada’s largest independent investment dealer. The opinions expressed in this article are those of the author and readers should not assume they reflect the opinions of Richardson GMP Limited, Member Canadian Investor Protection Fund.

While it may feel like you’re being bombarded with RRSP ads encouraging you to make your 2014 contribution before the March 2nd deadline, don’t forget about that other plan – the relatively new TFSA. Now in its sixth year, as of January 1st, you can sock away another $5,500 in your TFSA for 2015. Here are four TFSA tips that investors often overlook.

1. Contribution room is cumulative

For individuals who have yet to open up a TFSA, the cumulative total contribution room now stands at $36,500, consisting of $5,000 for calendar years 2009 through 2012 and $5,500 for 2013 through 2015. Of course, this assumes you turned 18 in at least 2009 (or earlier), the minimum age at which you can contribute to a TFSA.

2. Withdrawals can be re-contributed

Perhaps one of the most confusing rules is how TFSA withdrawals are treated when it comes to figuring out your TFSA contribution room.

The rule can be simplified as follows: the total dollar amount of TFSA withdrawals (which can be a mix of original contributions, income and gains on those contributions) gets added to your TFSA contribution room for the following calendar year.

Still confused? Let’s say Katy contributed the maximum of $36,500 to her TFSA. On May 1, 2015, when her TFSA is worth $50,000, Katy decides to buy a new car and withdraws the full amount. Katy’s TFSA contribution limit for 2016 will therefore be $55,500, consisting of the $50,000 withdrawn in 2015 plus the 2016 annual amount, assumed to be another $5,500.

If Katy were to contribute anything further in 2015, however, she will pay a penalty tax as she will not have the contribution room until next year.

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If you don’t have the cash lying around to fund your 2015 contribution, don’t forget that you can contribute to your TFSA “in-kind” by transferring in securities from your non-registered account.

But keep in mind that if you are contributing a security with an accrued capital gain, a contribution in-kind will give rise to an immediate capital gain.

Unfortunately, the reverse is not true. If you are contributing an asset with an accrued loss to your TFSA, that loss will be denied.

A better strategy would be to dispose of the underwater security first, recognize the capital loss, and contribute the proceeds of sale to your TFSA. Then, if you want to buy back that original security (in the hopes that it will rise), be sure to wait 30 days. If you don’t, your capital loss will be disallowed, since the “superficial loss” rule in the Tax Act doesn’t permit you to claim a capital loss if you buy back the same security, either directly or in your RRSP, RRIF or TFSA, within that 30-day period.

4.You can keep your TFSA if you leave Canada

Finally, should you ever leave Canada and become a non-resident, there’s no need to close your TFSA. From Canada’s perspective, you can keep your TFSA and you won’t pay any Canadian tax on earnings or growth in the account nor will you be taxed on withdrawals from your TFSA.

Note that you won’t generate any new TFSA contribution room for any calendar year throughout which you’re a non-resident.

However, any withdrawals made while you’re a non-resident will be added back to your TFSA contribution room in the following year (as discussed above) but will only be available to you if you move back to Canada.

If you are looking to stash even more cash in a tax-free savings account than the government allows, there might be some free space hanging around your house doing nothing.

That free space could come in the form of adult children who don’t have the money to contribute to a TFSA for a variety of reasons.

Canadians, who can contribute up to $5,500 annually to a TFSA, are still waiting for the Conservatives to go ahead with a promise to double annual contributions once the budget is balanced. In the interim, now that Jan. 1 has passed, at least you can kick in your annual limit again which brings the total allowable contributions to date $36,500.

The TFSA also applies to your adult children who are allowed to start making annual contributions in the year they turn 18.

You can’t actually directly contribute to someone else’s TFSA account but what’s to stop you from gifting something to your kids and having them starting making contributions as soon as they are eligible?

Cindy Crean, managing director of private client for Sun Life Global Investments (Canada) Inc., is doing just that with her children who are now 22 and 20.

“If you are intending on gifting your adult child money anyway, this is a good way to do it because it will grow tax-free,” said Ms. Crean.

In her case, she has power of attorney over both their accounts, which allows her to control trading in the accounts while teaching her adult children about investing.

The risk? There is absolutely nothing legally that prevents either child from withdrawing money right after the deposit has been made.

“Both of our kids handle money well and we’ve said to them ‘this money is if you decide to do another degree or for if you get married and buy a home’ but it’s not money for some ski trip,” said Ms. Crean. “They’ve agreed to it as long-term savings.”

Jamie Golombek, managing director of tax and estate planning at CIBC, said he can’t say for sure how prevalent this practice of gifting TFSA money has become.

“I know we talk about it in every client meeting. It’s a great way to do inter-generational tax planning,” said Mr. Golombek, noting that for the average Canadian it might not mean much as many people are struggling to maximize their own TFSAs and Registered Retirement Savings Plan holdings.

Mr. Golombek said grandparents are often behind some of the “TFSA gifting” going on these days.

“You can’t control if they go out and buy a car or something, there is just no way,” said Mr. Golombek, adding on a practical level parents can control the investment by refusing to make further gifts if children are just spending the TFSA money.

Raymond Leclair, vice-president of public affairs of the Lawyers’ Professional Indemnity Company, said in general you can’t put parameters on a gift.

You can’t control if they go out and buy a car or something, there is just no way

“If you are concerned about control you want to set up a living trust [not a TFSA],” said Mr. Leclair. “You contribute to a trust that you create, make yourself the administrator. It may be for the kids but you reserve the right to withdraw it completely if something goes wrong.”

So much of this depends on how much you trust your children. If you can think of your entire family in terms of wealth management, planning becomes that much easier.

But Toronto-fee based planner Jason Heath warns parents really need to make sure they have their own house in order before helping out children, lest they run out of money in retirement.

“You need to have more than enough money to fund your own retirement. It’s not a bad idea in that case to advance some of the money,” says Mr. Heath. “But technically, this is now their money. I’d tell any client to make sure they know that this is now the kid’s money and you are giving it away.”

As you go through life’s many changes, there are different ways that a TFSA can play a part in your financial planning needs. There are no hard and fast rules about how and when to use your TFSA contributions. But there are times when a shift in your investment strategy can make perfect sense.

One important thing to note is that whatever stage you are at in your investment journey, when it comes to deciding between a TFSA or RSP it shouldn’t have to be an either/or decision, says Lloyd Monteith, a London, Ont.-based CPA, CA. “It’s more advantageous to have both unregistered as well as registered accounts.”

In some situations, TFSAs can be better than RSPs, he notes. “People often think they need to put all their money in RSPs. Then, when they want to make a major purchase, such as a car, they end up making a withdrawal and paying tax on the funds. If they’re older, they may also subject themselves to the reduction of their OAS [old-age security] benefits because of the claw-back when they could have withdrawn the funds from a TFSA tax-free.”

While every situation is unique, financial needs tend to follow a similar pattern through different life stages, says William Britton, CFP (certified financial planner) and investment representative for Marlin Financial Services Inc. in Kingston, Ont.

“Younger investors tend to need liquidity and stability as they start building things up yet want easy access to funds for major purchases, such as a home or a child’s education. At that stage in life their financial planning needs to be nimble because they don’t know what may be coming or what expenses they can afford to handle.”

As people hit their stride career- and income-wise, they may shift to using their TFSA as an asset accumulation tool, Britton explains. “That’s when you start looking for long-term payoffs. Depending on your situation, you can start changing your asset allocation and take on more growth opportunities.”

When people are approaching retirement they often need to return to a liquidity strategy in order to generate income, Britton says. “It’s interesting how it all comes full circle.”

Whatever the stage, investment strategies should match up with your objectives and appetite for risk, Britton advises. “There’s nothing wrong simply using a high-interest savings account, for example, if you want money to be available when you need it.”

Even the best-laid plans can change, however, he adds. “What’s nice about a TFSA is that if something does happen – such as a divorce or job loss – it’s very easy to shift asset allocations as these things come up.”

The added benefit of a TFSA is that any income that is withdrawn – whether it’s in increments or lump sums – is not subject to tax, regardless of whether you are starting out in your career or well into retirement.

Time horizons can also play a major part in investment decisions, says Andrew Beer, manager, strategic investment, for Investors Group in Winnipeg. “In a typical world, when you start out you have the time horizons to take on risk because you have lots of time ahead of you. That could mean taking on more equities.”

During the later income-focused stages, it often makes more sense to have a more balanced TFSA portfolio, Beer notes. “You might want a mix of fixed-income and equity so you have a steady income stream.”

The most important thing to consider is that there is no one-size-fits-all approach when it comes to allocating assets, says Barbara Stewart, partner and portfolio manager with Cumberland Private Wealth Management Inc. in Toronto. “Age is really only one part of your strategy. The No.1 question you really need to ask yourself is what is the money for? The answer can change significantly and affect the evolution of your portfolio.”

She also cautions that the investment climate means strategies have changed. “With the low interest rates we’re seeing today, [even conservative] investors have moved away from bonds in favour of higher-quality dividend-paying stocks.”

At the end of the day, Stewart says, “It’s about understanding whether you are looking at income, growth or something in between. Every investor is unique and every investment decision has to be in the context of your overall life situation.”

This story was produced by Postmedia’s advertising department on behalf of PC Financial for commercial purposes. Postmedia’s editorial departments had no involvement in the creation of this content.

]]>http://business.financialpost.com/personal-finance/tfsa/evolving-your-tfsa-to-meet-lifes-changes/feed/0asideSponsored by PC FinancialThis story was produced by Postmedia’s advertising department on behalf of PC Financial for commercial purposes. Postmedia’s editorial departments had no involvement in the creation of this content.Happy Senior Couple on the Bow of a Sail BoatWhen RRSPs are not the answerhttp://business.financialpost.com/personal-finance/retirement/rrsp/when-rrsps-are-not-the-answer
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In Canada, few actions are deemed more virtuous than contributing to an RRSP. The implicit assumption is that an RRSP is the best retirement vehicle in all situations. After all, RRSP contributions are tax-deductible and the investment income is tax-sheltered until the money is withdrawn.

But, it turns out there are times when a tax-free savings account is a better vehicle. And if you have maxed out your contributions to the TFSA, you might even be better off saving outside of any tax shelter at all.

Consider the TFSA contribution limit first. The maximum annual contribution to a TFSA is only $5,500, but remember that these are after-tax dollars. For someone in a 48% tax bracket, an RRSP contribution of $11,460 is equivalent to contributing $5,500 to a TFSA.

This doesn’t mean that saving in a TFSA is the same thing as saving in an RRSP. In most cases, one vehicle will definitely be more tax-effective than the other. The question is which one? The answer to this question depends on whether you will be in a higher tax bracket when you make the contribution versus when you retire.

For instance, if you live in Ontario and your taxable income (not your gross income) is currently in the $50,000 range, your marginal tax rate is about 31%. (It will vary a little in other provinces.) If you are in the early part of your career with good prospects for advancement, you may well end up in a 46% tax bracket by the time you retire. If so, a TFSA will be worth about 27% more (after-tax) than an equivalent RRSP. If you retire in a lower tax bracket, the opposite would happen.

When in doubt, your choice should be skewed in favour of TFSAs for another reason. Even if you do not think you will ever change income tax brackets, your marginal tax rate is likely to rise over time simply because the government will need the money. Healthcare spending is expected to skyrocket over the next 25 years (see the C.D. Howe report released on December 10, 2014), while the ratio of workers to retirees will just as surely fall to nearly half what it is today. Given these circumstances, it is hard to see how governments will be able to avoid hefty tax increases.

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The conclusion is that TFSAs can be more tax-effective than RRSPs under certain circumstances.

What is more remarkable is that investing outside of any tax shelter can be more effective than within an RRSP. The reason is that the favourable tax rates accorded to dividend income and capital gains do not apply inside an RRSP.

Consider an example. Assume an investor age 60 has a 20.05% marginal tax rate. Under the RRSP scenario, she invests $10,000 in an RRSP and gets a tax refund of $2,005, making the net investment $7,995. She invests the entire $10,000 in Canadian equities and earns a return of 7% a year. In five years, her RRSP account balance grows to $13,700, which, after tax, at 20.05% is worth $10,950.

Under the no-RRSP scenario, she invests just the net amount ($7,995) outside of any tax shelter. With the same 7% return, the value after five years is $10,920, practically the same as inside the RRSP. If she had climbed into a higher income tax bracket during those five years, then the value under the RRSP scenario would actually have been less.

This example might raise two objections. First, the reader might argue that the RRSP scenario (assuming no change in marginal tax rate) is about the same or a little better than the no-RRSP scenario so why not stay with it? The reason is that under the no-RRSP scenario, you would have all that unused RRSP contribution room that you could use later in your career when you are in a higher tax bracket.

The second potential objection is that surely no one invests 100% of their RRSP in equities. Perhaps, but they do invest 50% or 60%, or even more at younger ages. The strategy in this case would be to have a smaller RRSP that holds only the fixed-income investments and hold the equities outside of the RRSP until you are in a higher tax bracket.

To summarize, here are some basic rules of thumb to consider as long as your marginal tax rate is low (under 30%):

Don’t contribute to an RRSP. Contribute to a TFSA instead.

If the TFSA doesn’t provide enough contribution room, concentrate your fixed-income investments in the TFSA and hold equities in an unsheltered fund rather than in the TFSA or an RRSP.

Make catch-up contributions to the RRSP later in your career when you are in a higher tax bracket; those catch-up contributions can be made with the money you saved in the unsheltered fund.

To the extent that you invest in fixed income, do so inside an RRSP or TFSA.

The headlines in a Financial Post series on tax-free savings accounts point to some big winners, but Canadians are mostly losers.

‘Losers’ may be too strong a word — describing them as boring investors barely keeping ahead of inflation sounds about right.

There are some decent teaser rates on TFSAs, but after the initial special expires most of the time you are left with a rate below October’s 2.4% inflation rate.

More than a few readers have reacted angrily to the Post‘s annual contest encouraging Canadians to show us who has the most money in their TFSA, the savings product launched in 2009.

Canadians can put up to $5,500 annually in a TFSA, the cumulative total since 2009 is $31,000. One Calgary advisor has managed to push his initial investment to more than $275,000 by purchasing leverage exchange-traded funds and other investments many would call risky.

“Why don’t you just encourage people to play the lottery,” one angry reader emailed.

A high-risk bet on an obscure mining stock — as one investor made — may seem like gambling, but what do you call the opposite strategy of doing absolutely nothing in your TFSA. How about a guaranteed loss?

A Bank of Montreal study released last month found on average Canadians have $17,490 in their TFSAs and 60% of the money is in cash. In this case cash isn’t king, it’s more akin to a pawn on a chess board about to be taken.

“Most people are investing in cash, mutual funds or GICs and they are seeing it as a [regular] savings account,” said Christine Canning, head of everyday banking products for BMO Bank of Montreal. “It’s almost too conservative. In a world where the returns are tax-free, this is a good place to be taking some market risks.”

There has to be a middle ground between the penny stock and the boring savings account, and Canadians probably need to do readjust their thinking.

Author Talbot Stevens says the TFSA is the one investment play in which you should take a shot at a big win. “If you are ever going to shoot for a 10-bagger, what way should you shelter it? In your RRSP? Outside your RRSP? Or in your TFSA? It’s clearly TFSA because it’s all sheltered,” he says.

The obvious downside is if you miss big in your TFSA, you can’t claim a capital loss and that investment room is gone forever.

Lorne Zeiler, a wealth advisor with TriDelta Financial, says there is a compromise and thinks the TFSA is a great place to put high-yield income products.

In a world where the returns are tax-free, this is a good place to be taking some market risks

“You really need to look at your total portfolio,” says Mr. Zeiler, adding some clients who keep a certain portion of their wealth in growth-oriented stocks earmark those holdings for the TFSA. “If it pays off, they don’t want the huge capital gain associated. We look at the asset allocation first and then determine where it makes sense to put different assets.”

Tom Hamza, president of the Investor Education Fund, said the TFSA is still in its infancy so that may be one of the reasons Canadians are still coming to grips with investing styles.

“Some of the issue is a lot of the times the TFSA is being used for short-term savings and purchases,” said Mr. Hamza. “As time goes on, and the ceiling increases, it’s going to be probably reflected in more people using it for retirement savings.”

Ottawa has pledged to double the annual contribution limit once the budget is balanced and, long-term, that has the potential to grow TFSA balances very quickly.

The federal department of finance, in its most up-to-date statistics, said 8.2 million Canadians had invested $62 billion by the end of 2011.

“I think some of the [investing style] has to do with a low balance. When you have a low balance, you don’t pay much attention to your account,” said Mr. Hamza.

Maybe it’s time to take a look at those TFSA investments. Or at least stop complaining about the people who are actually making money.

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Join moderator Jonathan Chevreau, and TFSA experts Garry Marr and Rubina Ahmed-Haq live online on Tuesday, Dec. 9 at 2 p.m. as they answer your questions and help you navigate the world of tax-free investing.

Sponsored by PC Financial

Rubina Ahmed-Haq is a financial journalist and personal finance expert with more than 15 years of experience. Her career spans three continents with appearances on TV, radio, print and online. She blogs weekly at RateSupermarket.ca. The last four seasons she has been the resident finance expert on CBC’s The Steven and Chris show and is a regular contributor on CBC Radio. She is also the Finance Editor for HOMES Publishing. You can read her columns in CondoLife and Active Life. She runs the website http://www.AlwaysSaveMoney.ca.

Jonathan Chevreau has been writing about personal finance since 1996 for the Financial Post, after starting his journalism career as a technology reporter for the Globe & Mail in the early 1980s. He has authored nine books on mutual funds, stock markets and investing. The Wealthy Boomer: Life After Mutual Funds was published in 1998, introducing mutual fund investors to Managed Money and indexing. Read more at the spinoff Wealthy Boomer blog here. His latest book is a financial novel called Findependence Day. It’s a financial love story aimed at the children of wealthy boomers: young people just embarking on careers, family formation and investing. You can read the spinoff blog or order the book at http://www.findependenceday.com. Jonathan is one of five “Masters of Money” experts blogging at blog.getsmarteraboutmoney.ca/.

Garry Marr’s cheapness dates back to as early as age seven, when he swallowed a dime and demanded the folks at the Hospital For Sick Children return it. He covers the real estate beat and personal finance. He started out his journalism life at the Peterborough Examiner where his crime stories got him hired by the tabloid Sun chain. He joined the Financial Post in 1998 just in time to be part of the new National Post. He is a graduate of the Canadian Securities Course and holds a Master of Arts degree in journalism from the University of Western Ontario.

Tax-free savings account holders audited by the Canada Revenue Agency are being banned from withdrawals by dealers who fear being left on the hook for a major tax bill.

The Investment Industry Association of Canada confirmed to the Financial Post that a member has been stuck with a bill because a TFSA holder withdrew all the money in advance of an audit.

The Canada Revenue Agency has been conducting an audit project aimed at people who it feels are operating a trading business within their TFSA, basing their suspicions on signs such as high balances and frequent transactions.

“It’s rare that [preventing withdrawals] will happen but we have heard this has happened in the case of the TFSA issue,” said Barbara Amsden, director of special projects for the Investment Industry Association. “The reason this can happen is because the CRA can come back to the dealer even after the client has left and dealer is on the hook for unpaid taxes.”

Ms. Amsden said a member had a case where the client left and three years later the CRA sent a request to the trustee for $134,000. The interest and penalties brought the bill to $154,000.

She has written to the Finance Department and the director general of the Canada Revenue Agency complaining of “insufficient guidelines” for TFSA investors to determine whether they’ve run afoul of tax rules and outlining the concerns her members have over liability.

“TFSAs are new but the reason it doesn’t happen on the RRSP side is because at some point the money is coming out, the money will be taxed. In the case of TFSA, it will never be taxed,” said Ms. Amsden.

Philippe Brideau, a spokesman for the CRA, did confirm some TFSAs are being scrutinized more closely but said it represents a small percentage of all account holders.

Individuals that have used TFSA provisions to avoid taxes on otherwise taxable income will be challenged

“While the vast majority of those who use the TFSA as an investment vehicle do so in accordance with the law, some may use this tool implemented to help Canadians with their lifelong savings needs in a manner contrary to the spirit of the legislation in order to significantly reduce the amount of tax they owe. Individuals that have used TFSA provisions to avoid taxes on otherwise taxable income will be challenged,” he said in an email.

Ms. Amsden said the controversy started in the West where there is more investment in oil and gas stocks that are considered highly speculative. Another factor in the enforcement, she said, is that CRA is relying on 1984 decision that dealt with RRSPs — a time when people didn’t make a ton of trades.

“We want the rules applied in a consistent fashion by the CRA. We just want a one page document that lets clients know who are getting into trading because they are interested in it, like retirees who might have this as a hobby, that they could be at risk,” she said.

Related

In the interim, dealers will continue to let TFSA holders trade but not withdraw.

That’s what a Toronto man says has happened with his current account. The man who runs a consultant business in the trade industry, who asked that his named not be used, said his account is well above $200,000.

“My broker told me I couldn’t withdraw any money because the CRA is auditing me,” he says. “I had just bought a house and I needed the down payment.”

I bought some penny mining stocks and now I can’t get my money

He ended up borrowing the money from friends to close his home sale but the case has been going on since February with no resolution.

“I bought some penny mining stocks and now I can’t get my money,” he says, referring to all the gains he’s made.

A Canada Revenue Agency crackdown on tax-free savings accounts has some people wondering whether TFSAs will always be shielded from a federal government that might be looking to generate cash.

Phillip Cross, a senior fellow at the C.D. Howe Institute and the former chief economic analyst with Statistics Canada, said any attempt to claw back money from the TFSAs of Canadians would probably be driven by need.

“I’ve seen estimates that the government deficit without any changes in spending programs will increase by 6% per year because of the aging of the population,” said Mr. Cross. “The hunt will be on to boost revenue. There is reason to be concerned about the long-term sustainability of some of these programs that shelter income from taxes.”

The TFSA was launched in 2009 and Canadians can now contribute $5,500 annually and have the money grow inside the account tax-free, to be withdrawn without penalty. There has never been a suggestion from Ottawa that it would ever tax money coming out of the accounts.

But tax and legal sources have confirmed to the Financial Post that the Canada Revenue Agency has created an audit project to investigate Canadians who have had a lot of transactions in their TFSAs and now have large balances, suggesting those people are effectively in the business of trading.

The CRA acknowledged in an email response Tuesday that it is taking a “closer look” at a very small percentage of accounts, “less than 0.0001% of all TFSAs” to make sure they comply with the spirit of the legislation.
“Individuals that have used TFSA provisions to avoid taxes on otherwise taxable income will be challenged,” the CRA said.
TFSAs have become increasingly popular with Canadians. The federal department of finance, in its most up-to-date statistics, said 8.2 million Canadians had invested $62 billion by the end of 2011. Individuals with income of less than $80,000 accounted for 80% of all TFSA holders.
“I wouldn’t say governments are above double taxation, it seems to be one of their favourite things,” Mr. Cross said about the idea Ottawa could ever go after contributions made to TFSAs which come from after-tax income.

“It plays a lot better with Canadians if you say you are just closing down loopholes.”

There is reason to be concerned about the long-term sustainability of some of these programs that shelter income from taxes

“I wouldn’t say governments are above double taxation, it seems to be one of their favourite things,” said Mr. Cross, about the idea Ottawa could ever go after contributions made to TFSAs which come from after-tax income.

Finn Poschmann, vice-president of policy analysis with the C.D. Howe Institute, says beyond the politics of a government reversing course, any taxing of TFSAs would also likely face a legal battle if it made any taxation retroactive by going after existing balances.

He said the rules on the TFSAs and what you can and can’t do inside one should end up eventually following the practice of what has happened with RRSPs. “Everyone knows you cannot run a business through your RRSP,” said Mr. Poschmann. “The TFSAs are new but the concept that you cannot run a business through a private tax exempt structure is not new.”

FotoliaTFSAs have become increasingly popular with Canadians. The federal department of finance, in its most up-to-date statistics, said 8.2 million Canadians had invested $62 billion by the end of 2011.

Mr. Poschmann says the rules in other jurisdictions for similar accounts, like the Individual Savings Account in the United Kingdom, are more restrictive. “They said these are going to be the rules for the first 10 years with no promises after that,” he said.

Fred Vettese, chief actuary of Morneau Shepell, has already pointed out a loophole around the Guaranteed Income Supplement that allows wealthy Canadian seniors to continue to collect it as long as they are deriving income from exclusively from their TFSA because the withdrawals are not considered for the GIS income-testing.

“It will be very difficult for any government to eliminate the TFSA but the most likely action is the government will study [the TFSA] further to decide whether they want to lift the limit,” said Mr. Vettese.

The Conservatives have pledged to double the amount Canadians can contribute to TFSA annually once the budget is balanced which is something Ottawa is on pace to do. At the time of pledge, the annual contribution was $5,000 but indexing to inflation, doubling would take that figure to $11,000.

“I think they are going to hold off on this until they give it a rethink,” said Mr. Vettese, adding the government might add a means test based on assets to determine whether people can collect GIS by using their TFSAs.

]]>http://business.financialpost.com/personal-finance/tfsa/is-your-tax-free-savings-account-safe-from-tax-collectors/feed/0stdtfsa1-Bank of CanadaFotoliaHere’s what will get your TFSA audited by the Canada Revenue Agencyhttp://business.financialpost.com/personal-finance/tfsa/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency
http://business.financialpost.com/personal-finance/tfsa/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency#commentsTue, 02 Dec 2014 13:13:30 +0000http://business.financialpost.com/?p=498483

The Canada Revenue Agency has an audit project targeting Canadians it feels are in the business of trading securities and using their tax free savings accounts to shelter the proceeds.

To determine whether something is operating as a business, the CRA typically weighs eight factors, legal sources say. And although none of the eight factors listed below may be sufficient on its own, a combination of them can lead to an audit, tax and legal experts suggest.

Ultimately, the CRA can say a taxpayer has broken the rules on a balance of probabilities and it’s up to the person to prove otherwise.

The eight factors are:

• Frequency of transactions — a history of extensive buying and selling of securities or of a quick turnover of properties

• Period of ownership — securities are usually owned only for a short period of time

• Knowledge of securities markets — the taxpayer has some knowledge of or experience in the securities markets

• Trading experience — security transactions form a part of a taxpayer’s ordinary business

• Time spent — a substantial part of the taxpayer’s time is spent studying the securities markets and investigating potential purchases

• Financing — security purchases are financed primarily on margin or by some other form of debt

• Advertising – the taxpayer has advertised or otherwise made it known that he is willing to purchase securities

• Nature of the shares - normally speculative in nature or of a non-dividend type

]]>http://business.financialpost.com/personal-finance/tfsa/heres-what-will-get-your-tfsa-audited-by-the-canada-revenue-agency/feed/0stdcraBank of CanadaCanadians with too many wins in their TFSA are being targetted by CRAhttp://business.financialpost.com/personal-finance/tfsa/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra
http://business.financialpost.com/personal-finance/tfsa/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra#commentsTue, 02 Dec 2014 13:02:28 +0000http://business.financialpost.com/?p=498395

Tax-free savings accounts, created just five years ago by the Harper government as a tool that would allow Canadians to grow retirement investments while sheltered from capital gains taxes, are increasingly being challenged by Canada Revenue Agency auditors targeting investors that show large gains in their account.

The CRA is also hitting investors with audits if they trade too frequently for the agency’s comfort. The CRA has argued that investors who use their TFSAs for frequent trading and earn large gains are effectively running a trading business, and should be taxed on income.

The sudden growth in CRA scrutiny has triggered concern from the Investment Industry Association of Canada, which recently complained of “insufficient guidelines” for TFSA investors to determine whether they’ve run afoul of tax rules, in a letter to the Finance Department and the director general of the Canada Revenue Agency (CRA).

In addition, a Calgary law firm says it is readying to fight Ottawa over the growing use of the “business” interpretation.

Sources from the tax and legal sectors confirmed to the Financial Post that the CRA has rolled out a TFSA audit project that has become increasingly active in the past couple of years. However, the amount of activity or balance that will trigger an audit remains unclear and the CRA was unable to offer comment to the Financial Post on Monday.

Auditors have reportedly been using an old tax ruling that disallows Canadians from using their TFSAs to “carry on a business,” an interpretation described as vague by critics.

Now a Calgary law firm says it is readying for a legal fight with Ottawa.

“There are a lot of people, day traders, with online brokerage accounts and they sit and buy and sell securities. Maybe 10 to 15 trades a day,” says Tim Clarke, a lawyer with Calgary’s Moodys Gartner Tax Law LLP, which is preparing to challenge the tax agency’s interpretation. “The CRA says that means you are trader in securities and you are carrying on a business.”

In the past, the CRA had targeted investors who were undervaluing closely held shares in their TFSA, exploiting the lack of liquidity to understate the equity’s likely value. Few people in the industry had argued against that crackdown.

But targeting vigorous — and successful — traders is a different approach by the CRA.

“They have no sense of humour about this. They assume since the maximum contribution you could make [as of 2013 was $31,000], if you’ve got $10-million in your TFSA something is wrong,” said Mr. Clarke. But often big TFSAs are held by high-risk investors who are simply enjoying their appropriate reward, he maintained.

If you’ve got $10-million in your TFSA something is wrong

“If you buy penny stocks and you’re an initial investor, you are taking a huge risk,” he said.

The TFSA, introduced in the 2009 tax year, is widely seen as a place to better take risks with investments, since all income including windfall gains, are tax-free forever, whereas in a registered retirement savings plan the money is taxed on withdrawal.

“There is a no case law on this business of carrying on a business in a TFSA,” said Lauchlin MacEachern, another lawyer with Moodys Gartner, who says he can’t comment on specific cases. “In the next year or two we expect there to be a case that goes to court and we’ll know whether carrying on a business in your TFSA means trading securities actively. We say that’s a question of fact and we also disagree with their legal interpretation.”

In all of these cases, the CRA has only to declare a “balance of probabilities” burden of proof has been met, leaving the onus on the taxpayer to prove that he or she should not be taxed as a business.

FotoliaSome taxpayers report that the CRA has offered them a deal where, if they agree to pay taxes on income within a TFSA, it will not demand additional penalties.

The Investment Industry Association of Canada seems to agree there needs to be some clear-cut rules and is also concerned about liability its members may have if a taxpayer were to withdraw all their money out of a TFSA before the tax bill arrives.

“The IIAC requests comfort that TFSA trustees will not be liable for any shortfall in taxes should funds within a TFSA be insufficient to cover off any liability arising by virtue of a TFSA being found to have carried on as a business,” the group wrote, in its submission to Ottawa.

Some taxpayers report that the CRA has offered them a deal where, if they agree to pay taxes on income within a TFSA, it will not demand additional penalties. That tactic has resulted in settlements, according to sources.

That’s what happened to one Quebec investment advisor, who says he was called a “pirate” by a CRA auditor. The advisor — who did not want to be identified due to his clash with the tax agency — was told he must pay income tax on all the gains inside his TFSA or face his wages being garnished along with interest penalties. The CRA says someone operating a “business” pays income tax on earnings, which is an even higher rate than the capital gains tax usually charged on investment income.

The Quebec investment advisor says he was flagged after making about 200 trades in his TFSA, manoeuvring his account to a value of about $180,000. He has since taken all the money out and paid taxes on it.

The accountants and lawyers have told me to shut up

“I’ve already paid the $35,000 and now I’m sure the province is going to come after me for their money,” he said, referring to provincial taxes he’ll owe based on the federal assessment. “The accountants and lawyers have told me to shut up.”

He claims he was able to make all this money because he has some expertise in resource stocks. “I could have lost that money,” he says, adding when he filled out forms for his TFSA under the know-your-client rule he said his profile was “100% risk and 100% speculation.”

He said the idea that he is a “professional trader” makes no sense because he’s never taken any specific trading courses and doesn’t execute trades for clients. “I can tell you what caught their eye. It was the amount. The [auditor] told me ‘you’re not allowed to make $180,000 in there.’ You know what? I think they’re jealous.”

Mr. Clarke thinks this would not be happening if not for some of the high balances seen from a bullish stock market.

“To have a portfolio that increases in value, you need a run up in shares and the value of the stock market, which is what we’ve had, and you need the CRA to be scrutinizing it,” said the lawyer. “In my view, what we need is a black line test, if you put a qualified investment into a TFSA, as long as it’s within the categories of qualified investment, it shouldn’t matter how you earn or lose money. The income should not be taxable and the losses not deducted.”

]]>http://business.financialpost.com/personal-finance/tfsa/canadians-with-too-many-wins-in-their-tfsa-being-targetted-by-cra/feed/1stdcashBank of CanadaFotoliaHow the Guaranteed Income Supplement is on a collision course with TFSAshttp://business.financialpost.com/personal-finance/tfsa/how-the-guaranteed-income-supplement-is-on-a-collision-course-with-tfsas
http://business.financialpost.com/personal-finance/tfsa/how-the-guaranteed-income-supplement-is-on-a-collision-course-with-tfsas#commentsSat, 29 Nov 2014 12:00:26 +0000http://business.financialpost.com/?p=498114

The “senior’s welfare” program known as the Guaranteed Income Supplement (GIS) appears to be on a collision course with Tax-Free Savings Accounts.

Both GIS and TFSAs were created largely for the benefit of Canada’s lowest-income seniors. But a clever end-run revealed this month in the Financial Post showed how even relatively rich couples can contort their finances so that they, too, can collect GIS for three years, generating more than $60,000 of tax-free income. Some of the recent furor over this gambit suggests that either GIS or TFSA rules may eventually have to be readjusted a result.

Launched in 2009, TFSAs motivate those with minimal savings or pension income to save for retirement, but they are also a boon to high-income Canadians. Unlike RRSPs, which are taxed on withdrawals, TFSAs are not taxable, and retirees using them for support don’t trigger clawbacks of benefits from income-tested programs like Old Age Security (OAS) or the GIS, which supplements OAS. Economic policy expert Richard Shillington says 31% of OAS recipients also receive GIS.

Retired actuary and pensions expert Malcolm Hamilton once quipped that senior couples who “never worked a day in their lives or saved a dime” can receive more than $20,000 a year from Ottawa. In 2014, that figure is now $25,360 in combined OAS and GIS benefits, most of it tax-free, while a single senior qualifying for maximum OAS and GIS, according to the government, receives $6,677 OAS and $9,053 GIS, for a total of $15,730.

Related

And as Morneau Shepell chief actuary Fred Vettese revealed, even affluent Canadians could collect GIS for three years between 67 and 70 by postponing when they collect their employer pensions, CPP benefits and RRSP income until age 70 — while drawing on a TFSA account to maintain lifestyle.

To implement Vettese’s strategy, Hamilton says a family would need to get its taxable income down to zero for three straight years: “no interest, capital gains, rents, employment income (even deferred payments from earlier periods of employment), or pensions other than OAS and GIS.”

One Department of Finance official speaking on background said he thinks this would rarely be possible. Most high-income individuals have other income sources and would inevitably render them ineligible for GIS. And since TFSAs have only been around five years and so remain mostly small, “this might be too hypothetical to comment on, given that the purported optimal scenario is decades away,” he said.

Still, Hamilton points out that the gambit does show “how fractured and incoherent our retirement system has become. Governments keep adding program after program, each piled absurdly one on top of another, until eventually only a genius can figure out how to navigate the retirement system.”

Almost 10 million Canadians now have TFSAs, and many couples now have more than $80,000 held jointly in them. The Conservatives have promised to raise the annual contribution limit to $10,000 a year per person once the books are balanced. In that case they’re about to get a lot larger.

John Stapleton, a former policy advisor for social assistance with the Ontario government, says this high-income GIS trick — he calls it a “policy flaw” — could be easily addressed by putting a ceiling on TFSA gains, after which the income tests for GIS and OAS kick in. He already tells low-income Canadians nearing retirement to “maximize their TFSA before they even dream about RRSPs” — since, once they try to cash out between 65 and 71, “they take a 50% hit on GIS from Dollar One.”

Shillington says he thinks low-income GIS recipients should be granted an income exemption on RRSP withdrawals, but thinks Ottawa would never go for it. (There is already a GIS exemption for the first $3,500 in wage income; low-income seniors may have at most $50,000 in RRSPs, and the ability to draw out $3,000 or $4,000 a year without impacting their GIS would be a big improvement for their finances.)
Hamilton says many in Finance “hated” the idea of the TFSA when it was conceived. Despite the common-sense advice that poor seniors should use TFSAs instead of RRSPs, new programs from various levels of government seem intent on using the RRSP structure; they will eventually generate more tax revenue and curtail GIS benefits for the elderly poor.

The new Pooled Registered Pension Plan (PRPP) and Ontario Retirement Pension Plan (ORPP) and even proposals for an expanded CPP would all eventually create taxable revenue for governments. “None of these are effective ways for Canadians with below-average incomes to save for retirement,” Hamilton says.

“However, they are effective ways for governments to make sure middle-income Canadians are denied GIS and other income-tested benefits, and this appears to be the dominant motivation.”

Hamilton says Ottawa is concerned about the cost of paying GIS to middle-class Canadians who substitute TFSAs for RRSPs. “They are trying to ‘force or coerce’ Canadians with below-average incomes” to save in RRSPs or vehicles that behave like them. If the Conservatives lose the next election, Hamilton says he would advise Canadians to max out their TFSAs just in case: including ones for their children.

Personally, I doubt TFSAs will ever be curtailed: The RRSP has been around more than half a century and contribution limits were raised over that time. Mathematically, the two programs are similar, but operate like mirror images: Higher-income retirees past age 71 need TFSAs to shelter investment income after they can no longer contribute to RRSPs or pensions.

Fixing the GIS instead would seem to make far more sense. But I agree with Hamilton that we should max out TFSA contributions while we still can — just in case.

]]>http://business.financialpost.com/personal-finance/tfsa/how-the-guaranteed-income-supplement-is-on-a-collision-course-with-tfsas/feed/0stdgisTFSAs much more than just a savings accounthttp://business.financialpost.com/personal-finance/tfsa/tfsas-much-more-than-just-a-savings-account
http://business.financialpost.com/personal-finance/tfsa/tfsas-much-more-than-just-a-savings-account#commentsWed, 12 Nov 2014 13:00:36 +0000http://business.financialpost.com/?p=490559

It’s been six years since tax-free savings accounts were introduced to Canadian investors. Since then a growing number of Canadians are learning that there are considerable advantages to having a TFSA as part of their financial planning.

As time progresses, and the funds grow, there are all sorts of ways investors can leverage their TFSAs to their advantage, whether it’s to build a nest egg for emergency purposes; provide a haven for trying out different investment vehicles; give a family member turning 18 a place to start saving; or withdraw funds tax-free in retirement.

The uptake for TFSAs has been extremely strong since they were introduced in 2009, says Gordon Pape, publisher of The Internet Wealth Builder and The Income Investor in Toronto, “The last numbers I saw from Revenue Canada were that over 40% of Canadians have opened a TFSA account. That’s a remarkable number in a short space of time. That shows how much people consider TFSAs to be an attractive way to put money aside for whatever purpose.”

Setting up a TFSA is not that complicated; and the basic rules are straightforward: People can contribute funds up to an annual limit of $5,500. If you fall short of that amount, the leftover contribution room carries over into the following year.

But as the years go by, people need to take greater care when it comes to withdrawals and re-contributions, especially if they have more than one TFSA. “Thousands of people are getting letters they have over-contributed because they didn’t wait until the end of the calendar year,” Pape says.

“I’ve seen some great benefits with TFSAs,” says Denise Wright-Ianni, a certified general accountant based in London, Ont. “But I’ve also seen people run into penalties too if they inadvertently go over their contribution room. That can happen pretty easily if you’re not careful. And if you put money back too early, Canada Revenue Agency [CRA] is right on top of it.”

The rules state that anyone withdrawing an amount from their TFSA can’t replace any or part of that amount until the following calendar year if they have already reached their contribution limit. If they have leftover contribution room they can deposit funds at any time. But it’s easy for people to lose track of what they can and can’t contribute at any given time as they start making and replacing withdrawal amounts.

The best way to stay out of hot water is to sign up for My Account with CRA which allows you track all your TFSA contributions online, Ms. Wright-Ianni advises. “It’s easy to forget what’s going on sometimes. You can also use it to track your RRSP contributions.”

The other issue that comes up is deciding how to invest money in a TFSA, Pape notes. “Many people still believe you can only put your money into a savings account but that negates the whole purpose of a TFSA, which is to accumulate as much tax-sheltered wealth as you can.”

This focus on investment strategies becomes increasingly important as the value of TFSAs continues to grow, Ms. Wright-Ianni says. “In the beginning, people started out with only $5,000. Now you could have as much as $31,000 as of 2014 if you contributed your limit every year, [and $36,500 as of 2015 year end]. That puts a different perspective on things. That money should be part of your entire financial and tax planning.”

The only time to put money into a savings-type account is when you need an emergency fund for quick access, Pape advises. Otherwise, money should be invested in something that can generate better returns. Choices range from high interest savings accounts to GIC, mutual fund or self-directed accounts. “It all depends on what you are saving for and your timelines.”

Following are some basics you should know about TFSAs:

The current contribution limit is $5,500 for the calendar year.

Unused contributions room can be carried over into the following calendar year.

Any person 18 years of age or over can open a TFSA account.

You can withdraw funds any time without penalty.

You cannot replace withdrawn funds in the same calendar year if you have reached your contribution limit – you must wait until January 1 of the following year. You can however redeposit funds if you have unused contribution room left.

You can have more than one TFSA account, but total contributions cannot exceed your annual limit plus any unused contribution room.

You cannot claim contributions to a TFSA on your tax return.

You cannot claim capital losses that occur within a TFSA account.

Withdrawals from a TFSA will not affect Old Age Security and other benefits because they are not considered to be income.

This story was produced by Postmedia’s advertising department on behalf of PC Financial for commercial purposes. Postmedia’s editorial departments had no involvement in the creation of this content.

]]>http://business.financialpost.com/personal-finance/tfsa/tfsas-much-more-than-just-a-savings-account/feed/0asideSponsored by PC FinancialThis story was produced by Postmedia’s advertising department on behalf of PC Financial for commercial purposes. Postmedia’s editorial departments had no involvement in the creation of this content.DC_Gordon_Pape05.jpgEven the rich can qualify for Guaranteed Income Supplement — here’s howhttp://business.financialpost.com/personal-finance/tfsa/even-the-rich-can-qualify-for-guaranteed-income-supplement-heres-how
http://business.financialpost.com/personal-finance/tfsa/even-the-rich-can-qualify-for-guaranteed-income-supplement-heres-how#commentsTue, 11 Nov 2014 20:10:52 +0000http://business.financialpost.com/?p=489947

If you have above-average income and significant assets, you probably think the Guaranteed Income Supplement (GIS) is not meant for you. The GIS is an income-tested pension program that, together with Old Age Security (OAS), helps low-income seniors avoid poverty. You might therefore be surprised to learn that even the relatively wealthy can re-organize their finances to qualify for GIS benefits, at least until they reach age 70.

GIS payments are reduced by $1 for every $2 of income for single persons and by $1 for every $4 in the case of married couples. Almost every source of income counts for purposes of calculating this reduction, with the major exception being OAS pension. The Guaranteed Income Supplement therefore diminishes as non-OAS income rises and, in the case of married couples, stops altogether once combined income exceeds $22,560. Or does it?

Most of us would agree that $22,560 plus OAS pension is not a lot to live on, especially if we want to enjoy an active life. Below, I will show how we can spend considerably more than that and still receive most, if not all, of the maximum GIS entitlement.

The key is to have assets, other than a pension plan or an RRSP, that we can turn into retirement income. Tax-free savings accounts are perfect for this purpose since withdrawals from a TFSA are not taxed or even considered to be income. Consider Tom and Susan in the example below:

Tom’s and Susan’s current age: Both 45, and paying off a mortgageRetirement age: 67 (by 2029, this is when OAS and GIS will start)Current pay: $80,000Final pay at 67: $153,000Annual contribution to a TFSA: The maximum ($5,500 at present)Annual contribution to an RRSP: 8% of payCurrent RRSP balance: $80,000

Saving 8% of pay in an RRSP plus another 7% or so in a TFSA might seem like a lot – and it is – but there are millions of Canadians who save even more. Over 50% of the participants in workplace pension plans also contribute to an RRSP and the number of TFSA accounts in Canada is closing in on 10 million.

By age 67, Tom and Susan will be millionaires if they follow the above saving regimen. They will have a mortgage-free house worth over a million dollars, an RRSP balance that is closing in on another million dollars plus a TFSA. And of course, they can also benefit from the government pension programs – CPP, OAS, and potentially GIS.

With $153,000 in final employment income 22 years hence, Tom and Susan will probably need no more than $80,000 of retirement income to match the lifestyle they enjoyed before retirement. While that represents only a little more than half of final pay, we need to remind ourselves that certain major expenditures will disappear by then such as saving for retirement, mortgage payments and child-raising costs. Income taxes will also be much lower in retirement.

Related

So, how do Tom and Susan manage to spend $80,000 from age 67 and on and still receive GIS? For starters, their OAS entitlement will amount to about $23,000 a year. The maximum GIS payment, if they can get it, will be another $21,000. That means they need to come up with another $36,000, but it has to come from the right source if they don’t want to lose the GIS.

To produce the last $36,000 of income, they tap into their TFSA which will have grown by retirement to about $320,000 (based on certain reasonable investment assumptions). They simply withdraw $36,000 a year from that TFSA, tax-free, for the three years between ages 67 and 70. During that time they defer commencement of CPP pension and keep their RRSP intact rather than rolling it over into a RRIF. The deferral of the CPP doesn’t cost them anything in terms of lost value since the initial payment grows by 8.4% for each year up to age 70. The $36,000 from the TFSA is not considered income for purposes of GIS so, in the eyes of CRA, this couple essentially has no taxable income between ages 67 and 70.

As a result of following this strategy, they get all of their OAS pension without claw-back and also receive about $63,000 in GIS payments. Moreover, once the GIS payments stop at age 70, they will be in a sound financial position since their RRSP savings will still be intact and their CPP payments will be larger than if they started CPP earlier.

Do many people do this? The answer seems to be no since only 1% or so of CPP beneficiaries elect to defer the start of their payments until age 70.

I asked Rona Birenbaum, Financial Planner with Caring for Clients, if there is any reason this strategy is not more widespread. Rona confirmed that the strategy certainly works based on existing tax rules but there may be two reasons why it is not pursued more often. First, it takes a number of years for someone to position themselves to take advantage of the strategy and TFSAs simply haven’t been around long enough. Second, there is the chance that the federal government will eventually nip this in the bud by adding an asset test to GIS. That said, there is limited downside in pursuing this strategy in the meantime since contributions to RRSPs and TFSAs are generally a good thing, whether we aim to collect GIS or not.

There is a third potential reason we don’t often see this strategy. Some people may question whether it is morally right, given that the purpose of the program is to help the financially disadvantaged. While that is probably a better question to ask a priest than an actuary, I personally wouldn’t feel right about collecting GIS. Still, we have to acknowledge the ethical question is more complicated than it seems.

Fact #1: Few taxpayers have any qualms about exploiting every legitimate tax deduction and loophole in order to minimize their income tax bill.

Fact #2: Most of us at one point or another have obtained a discount on some service rendered by paying the tradesperson in cash, knowing full well that the transaction will not be reported to the CRA.

It is a little ironic then that we generally suffer no pangs of conscience in doing what borders on the illegal, but hesitate to do something that is totally legal and falls in the same category as trying to minimize one’s tax bill. For those who are still troubled by the scheme, they can dial it back a little by forgoing the GIS and simply ensuring they receive their full OAS without claw-back.

For those of us who might wish to consider this GIS strategy, it will be interesting to see what happens to CPP and RRIF rules regarding when payments must start. Right now, payments cannot be deferred beyond age 70; at the same time, OAS and GIS currently start at 65. When the earliest starting age for OAS and GIS rises to 67, will the latest age to start CPP and RRIF withdrawals rise to 72, or even 75 given our ever-increasing life spans? And will a future government add an asset test for eligibility for GIS? We may not know the answer to these questions for years to come.

Fred Vettese is chief actuary at Morneau Shepell and co-author of The Real Retirement.

Join moderator Corey Goldman and TFSA expert Rubina Ahmed-Haq of PC Financial live online on Tuesday, Nov. 18 at 2 p.m. as they answer your questions and help you navigate the world of tax-free investing.

Rubina Ahmed-Haq is a financial journalist and personal finance expert with more than 15 years of experience. Her career spans three continents with appearances on TV, radio, print and online. She blogs weekly at RateSupermarket.ca. The last four seasons she has been the resident finance expert on CBC’s The Steven and Chris show and is a regular contributor on CBC Radio. She is also the Finance Editor for HOMES Publishing. You can read her columns in CondoLife and Active Life. She runs the website www.AlwaysSaveMoney.ca.

Corey Goldman is a contributor to both the Financial Post and Financial Post Magazine as well as founder and CEO of PR firm Goldman Communications.

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]]>http://business.financialpost.com/personal-finance/tfsa/the-truth-about-tfsas-join-our-live-chat/feed/0stdtfsaHis TFSA bet was so risky, the bank asked what he was up tohttp://business.financialpost.com/personal-finance/tfsa/his-tfsa-bet-was-so-risky-the-bank-asked-what-he-was-up-to
http://business.financialpost.com/personal-finance/tfsa/his-tfsa-bet-was-so-risky-the-bank-asked-what-he-was-up-to#commentsMon, 10 Nov 2014 22:04:23 +0000http://business.financialpost.com/?p=492183

David Hodgetts knew he was doing something outside the norm in his tax-free savings account when he got a call from a bank official asking if he was party to illegal insider trading.

He had taken the $31,000 balance — his financial advisor had pushed his balance to that from $25,500 in contributions — and invested it in a junior uranium mining stock called Paladin Energy Ltd. He bought the stock at 38.5¢ per share and later sold it for 60¢.

“I got a call to ask if I had an insider knowledge because it was such an odd move,” said Mr. Hodgetts. “They checked up on my reasons for investing in it.”

His logic was that after the nuclear accidents in Japan uranium stocks were at a low; it was only a matter of time before the sector turned around.

Mr. Hodgetts eventually sold his entire stake and took a flyer on Air Canada at $5.87-a-share in March. Air Canada now trades well above $9 and his portfolio was worth $93,086 as of last week which includes a $5,500 contribution he made for 2014.

“I took the TFSA money from my advisor last year,” he says, adding most of the investments were in conservative exchange-traded index funds.

He originally got interested in his own investments when he took out a line of credit on his condominium and started his own investment account. “My returns were so much better than I was getting in RRSPs. I keep my RRSP because I don’t want to go overly risky on stuff that I want to retire on,” says Mr. Hodgetts. “I kind of look at those RRSPs and say ‘I’ve got no concerns there’ and I look at the accounts I want to gamble in.”

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Mr. Hodgetts opened an RRSP account in his early 20s and has maxed out contributions every year. “I give all that money, that I’m going to retire on, to an investment advisor,” he says.

He says the TFSA really shouldn’t be named savings account but renamed to reflect the fact it is an investment account where you can make major gains and not worry about the taxes.

Do you have a TFSA story? We want to hear about your victories but also your losses. Email Garry Marr with it atgmarr@nationalpost.com. We don’t necessarily have to publish your name, as long as you give us a glimpse of your statement.

Twitter.com/dustywallet

]]>http://business.financialpost.com/personal-finance/tfsa/his-tfsa-bet-was-so-risky-the-bank-asked-what-he-was-up-to/feed/0stdFP1112_TFSA_number_illoAs the end of year approaches, it’s time to plan your TFSA withdrawalshttp://business.financialpost.com/personal-finance/tfsa-withdraw-canada
http://business.financialpost.com/personal-finance/tfsa-withdraw-canada#commentsSat, 08 Nov 2014 12:45:12 +0000http://business.financialpost.com/?p=490084

Parts of Ontario received their first snowfall of the season this past week (apologies to Calgarians who have already braved “Snowtember”). Meanwhile, stores have begun unveiling holiday decor. The end of the year is nigh.

Aside from holiday shopping and gifting, financial planning experts are advising people to also turn their minds to their tax-free savings account as 2014 draws to a close.

While there may not be a rush to contribute to your TFSA before a certain deadline (except that the earlier you have more savings compounding tax-free the better), withdrawals are another matter. If you must withdraw money from your TFSA, it’s best to wait until the end of the year.

Firstly, it’ll keep you organized. Withdrawing funds throughout the year can lead to confusion and over-contributions.

You can contribute $5,500 every year and if you haven’t contributed a cent since TFSAs were introduced in 2009, you have $31,000 of unused room. Your unused contribution room gets carried forward to the following year.

Make sure you keep track of each time you take money out and then put money back into your TFSA — or TFSAs if you’ve opened multiple accounts. (Note that if you withdraw funds from one TFSA, putting it into another one will count as a new contribution.)

Secondly and more importantly, any withdrawals you make now can be put back as soon as Jan. 1. So, if you’re planning on withdrawing money in the near feature, do it before New Year’s Day. That gives you the option of putting that amount back into your TFSA in 2015.

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Let’s say, for example, on Dec. 1, you decide to take out $3,000 to clear out some high interest debt. If you later receive an unexpected company bonus or get extra work over the holidays, you can put that $3,000 back on Jan. 1 (along with another $5,500 for 2015). You’ll only have lost a month growth on your investments.

“This is definitely the time of year to make sure that you haven’t over contributed and to plan contributions for the next year,” certified financial planner Jason Heath says.

Why would you want to take money out of your TFSA at this time of year? “You have to make sure that the money that is in there is best invested in your TFSA as opposed to elsewhere such as in an RRSP, RESP, [or toward] debt repayment,” Mr. Heath says.

Because TFSAs have incredible flexibility when it comes to withdrawals and contributions, end of year is a good time to make strategic money moves, he adds. A lot of other deadlines that compete for your funds crop up at the end of the year. For example, could money in your TFSA be better used as a contribution to your RRSP before the March 1, 2015 deadline or as a lump sum payment against your mortgage (with a deadline that is based on your calendar year end)?

“If you have TFSA money, especially if your kids are in high school, you can shift money from your TFSA to your RESP and still have it grow tax-sheltered but get a 20% government grant to accelerate that growth,” Mr. Heath says. The maximum grant you’ll receive is $500 (or 20% of $2,500) every calendar year.

But pay attention to your contributions and withdrawals. A new BMO survey reveals that while Canadians hold an average of $17,490 in their TFSA, with nearly half using their account for retirement savings, only one-in-five are aware of the $5,500 maximum annual contribution to a TFSA and one-in-10 TFSA holders have over-contributed in the past, costing an average of $412.50 in penalties. The Canada Revenue Agency warned 54,700 taxpayers early this year that they had over-contributed to their TFSAs in 2013.

You will be taxed 1% of the excess amount every month that the extra money stays in your TFSA.